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Electricity Insecurity and Manufacturing SMEs
How does electricity insecurity affect businesses in low and middle income countries?
Andrew Scott, Emily Darko
July 2014
Presentation overview
• Study Aims and Research Questions • Methodology • SMEs and Electricity data overview • Electricity insecurity and SME productivity • Electricity insecurity and SME cost-competitiveness • Electricity insecurity and SME investment • Mitigating the effects of electricity insecurity • Conclusions
3
Study aims and research questions
Study Aims
• Assess and quantify the impact of electricity insecurity on firm productivity and competitiveness, and on investment decisions for start-up and expansion
• Improve understanding of how SMEs mitigate the effects of electricity insecurity on their operations
5
Research Questions
• How does electricity insecurity impact on SME’s productivity? • How does electricity insecurity impact on SME’s cost-
competitiveness? • How does the perceived threat of electricity insecurity influence
businesses’ decision-making when considering whether to move into a new area or develop their business?
• What strategies and tactics have SMEs developed (on both supply-side and demand-side) to cope with and mitigate the impacts of electricity insecurity?
6
Methodology
Methodology
1. Literature review: review of grey and published literature on how electricity insecurity affects manufacturing SME cost-competitiveness and productivity, influence on start-ups and investment decisions and on how SMEs cope.
2. Data analysis: analysis of firm-level surveys by looking at data from country-wide enterprise surveys in low- and middle-income countries and through regression analysis on data from the World Bank Enterprise Surveys for six selected countries.
3. Qualitative interviews: key informant interviews in four countries (Bangladesh, Nepal, Nigeria and Uganda) with SMEs and stakeholders from business development and finance organisations, government and the energy sector.
8
Methodology: Literature Review
Literature Review • Two broad categories of literature were found:
– empirical/statistical analysis (usually analysis of household/enterprise survey data)
– anecdotal/qualitative approaches, within small areas or comparison across areas
• Literature explicitly on manufacturing SMEs is limited
• There is considerably more literature on the effects on firms of access to electricity than on electricity reliability
9
Methodology : Data analysis
Country selection and data focus • 6 countries were selected for statistical analysis: Bangladesh, Nepal, Nigeria,
Pakistan, Tanzania and Uganda – Selected for geographical location, proportion of SMEs and impact of SMEs in
economy and importance of electricity insecurity • Focus on manufacturing sector SMEs, and all SMEs in the enterprise survey data
are formal sector • Data source: World Bank Enterprise Surveys
10
Methodology : Data analysis
Regression Analysis • Regression analysis carried out to determine effects of electricity insecurity
on firms’ total factor productivity, cost-competitiveness, investment and generator ownership
• Effect of electricity insecurity on SME productivity: regressions on enterprise total factor productivity, labour productivity and losses from outages
• Effect of electricity insecurity on cost-competitiveness: regressions on cost of electricity as proportion of total production costs and as proportion of non-labour costs
• Regressions on impact of electricity insecurity on investment, focusing on data on expenditure by enterprises on fixed capital
11
Key characteristics of samples analysed
Bangladesh Nepal Nigeria Pakistan Tanzania Uganda
Enterprise Surveys Year of survey
2013 2013 2010 2004-07 2006 2006
Total number of firms 1180 241 1549 935 273 307
Number of SMEs 819 180 1485 771 239 282
Average age of firms (years)
20.9 18.8 17.0 23.1 14.3 12.8
Proportion (%) owning a generator
57.8 56.0 83.9 30.8 49.1 27.7
Number of outages per month 80.0 13.3 30.3 32.8 11.7 11.0
Average duration of outage (hours)
1.35 3.76 8.92 2.22 7.44 11.17
12 Source: World Bank Enterprise Surveys
Methodology : Qualitative Interviews
• Key informant interviews were conducted in 4 countries: Bangladesh, Nepal, Nigeria and Uganda.
• Semi-structured interviews conducted with 40 SMEs and 42 stakeholders (e.g. business associations, financial institutions, enterprise funds, investment authorities and energy sector organisations)
• Interview questions to SMEs addressed their experiences with electricity insecurity and the impact on their business, and how they cope
• Stakeholders were asked about their perceptions of impacts on productivity and investment, and suggested best practice on mitigating strategies
13
Overview of research findings: Qualitative Interviews
14
SMEs interviewed by sector
Food and beverages
25%
Construction materials, wood, metals and paint
25% Textiles
17%
Machinery and equipment
15%
Cosmetics 7%
Handicrafts 5%
Paper and printing
3%
Plastics 3%
15
Stakeholders interviewed by type of organisation
Business Association
Government/ Donor/
Enterprise Fund
Financial Institution
Electricity Sector Organisation
Other organisation
supporting SMEs
Overview of research findings: Qualitative Interviews
SMEs and Electricity Data Overview
Overview: SMEs
• MSMEs in emerging markets: almost 90 million • Proportion of jobs in the developing world provided by MSMEs: two-thirds • Proportion of new jobs created by informal sector in Africa: 93% • Proportion of SMEs in the manufacturing sector: 22%
17
Sources: IFC MSME Country indicators, World Bank Enterprise Surveys
Electricity
• Cost to get electricity in sub-Saharan Africa (as a percentage of income per capita): 4,736.9%
• Days to gain access to electricity in South Asia: 148 • Electricity losses as a percentage of output in South Asia: 20.3% • Hours for an average outage in South Asia: 2.4 and SS Africa: 5.3 • Percentage of SMEs identifying electricity as a major constraint in SS
Africa: 48.8% and South Asia: 51.1%
18 Sources: IFC MSME Country indicators, World Bank Enterprise Surveys
MSME indicators for selected countries
19
Country MSME definition (no. workers)
% MSMEs in manufacturing
MSMEs per 1,000 people
Informal MSMEs per
1,000 people
MSME employment (% total)
Bangladesh 1 - 99 28.8% 20.1 40.5 12.8
Nigeria 1 - 50 - 61.1 61.1 50.0
Nepal 0 -199 74.6% 1.7 - 76.1
Pakistan 1 - 250 48.3% 18.7 - 78.0
Tanzania 1 – 99 8.9% 1 76.7 -
Uganda 1 – 99 12.9% 6.2 40.7 6.1
Source: IFC (2013)
Sectoral distribution of SMEs in selected countries
20
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Bangladesh Nepal Nigeria Pakistan Tanzania Uganda
Manufacturing Retail Other services
Source: World Bank Enterprise Surveys
Quality of electricity in selected countries
21
Number of electrical
outages in a typical month
Duration of a typical electrical outage (hours)
Losses due to
electrical outages (% of annual sales)
Percent of firms
owning or sharing a generator
Proportion of electricity
from a generator
(%)
Days to obtain an electrical
connection (upon
application)
Percent of firms
identifying electricity as a major constraint
Bangladesh 100.7 1.1 10.1 52.3 11.9 50.3 78.4
Nepal 8.7 1.2 10.4 50.5 7.4 21.3 68.8
Nigeria 25.2 7.8 8.5 85.6 52.1 7.5 75.9
Pakistan 31.7 2.1 8.2 20.1 6 106.3 74.5
Tanzania 9.1 6 7.3 45.7 16.8 44.3 88.4
Uganda 10.7 9.7 9.4 28.9 8.9 33 84.2
Source: World Bank Enterprise Surveys
Percent of firms identifying electricity as a major constraint
22
0
10
20
30
40
50
60
All Countries East Asia &Pacific
Eastern Europe& Central Asia
Latin America& Caribbean
Middle East &North Africa
South Asia Sub-SaharanAfrica
Source: World Bank Enterprise Surveys
Outages by number and duration
23
0
5
10
15
20
25
30
35
40
All Countries East Asia &Pacific
EasternEurope &
Central Asia
Latin America& Caribbean
Middle East &North Africa
South Asia Sub-SaharanAfrica
Number of electrical outages in a typical month Duration of a typical electrical outage (hours)
Source: World Bank Enterprise Surveys
Electricity insecurity experienced by small, medium and large firms
Number of outages per month Sales(%) lost due to outages
Small Medium Large Small Medium Large
Bangladesh (2013) 64.5 73.1 53.0 7.0 4.4 4.9
Nepal (2013) 11.3 31.8 4.7 18.1 20.2 n/a
Nigeria (2010) 24.9 25.7 29.0 9.1 8.5 6.8
Pakistan (2007) 32.0 34.5 21.6 9.2 9.4 7.6
Tanzania (2006) 9.2 8.8 12.2 17.4 18.9 13.7
Uganda (2013) 5.3 10.5 4.5 10.7 14.4 13.7
24 Source: World Bank Enterprise Surveys
Cost distribution of firms
Country Labour costs (%) Electricity costs (%)
Materials costs (%)
Other costs (%)
Bangladesh 14.26 2.20 78.43 4.95
Nepal 6.91 2.69 85.71 4.62
Nigeria 11.26 0.37 79.81 8.35
Pakistan 7.50 3.72 84.04 4.74
Tanzania 11.57 2.39 90.20 6.86
Uganda 10.27 1.61 73.22 12.30
25
Source: calculated from World Bank Enterprise Surveys
Electricity Insecurity and SME Productivity
“Access is very, very cheap, if everything was
working properly…” Onitsha Chamber of
Commerce employee
Nigeria experiences 25.2 outages a month, lasting an average of 7.8 hours
Everything goes hand in hand, so for example without electricity it is hard
to use technology, no electricity means lower levels of productivity
from using more basic tools. Manual labour is slower.”
Federation of Women Entrepreneurs Association Nepal
Electricity Insecurity and SME Productivity
• Many firms which experience outages have lower productivity but the results are mixed
• When electricity insecurity is measured in terms of duration and frequency of outages, lower productivity is associated with more frequent and longer outages
• There is no consistent variation in the effects of outages on labour productivity between different types of SME
• Variation in findings between countries seems to be related to differences in geography, economic structure and SME sector, and overall business environment
29
Electricity Insecurity and SME Cost-competitiveness
“Our prices are competitive among similar companies that are doing
quality services, but higher than small companies who don’t care about
quality. This is a big challenge. We are losing clients to those low quality
companies” Medium-sized bakery business in Uganda
Electricity insecurity and SME cost-competitiveness
• Absence of literature on the influence of electricity insecurity on SME competitiveness
• SMEs experiencing outages do not necessarily have higher unit costs of production
• Explanation for the absence of significant effect on unit cost: – the small proportion of electricity in total costs – outages stimulate better management practice, reducing negative
effects on unit costs • Competitiveness also depends on product quality and ability to meet
orders on time, neither of which are captured in enterprise survey data
32
Electricity Insecurity and Investment
“I’m seeing a tendency of people becoming middlemen rather than
involving in the production process. Such middlemen would easily have
involved in production had there been enough electricity and no additional
cost for diesel generator” Small-sized Nepalese coffee processing SME
“Investment decision has not much to do with electricity availability because our biggest problem in investing more
is that we are not able to compete with cheap Chinese products” Medium sized Nepalese textile SME
Electricity insecurity and SME investment
• Literature reveals a lack of finance and poor infrastructure influence growth of medium and large firms; small firms are more affected by business regulations
• Electricity insecurity can influence investment decisions, but is neither the only nor the most significant factor
• No consistent finding about the impact of greater electricity insecurity on investment, nor of different impact for more capital-intensive firms
• Electricity insecurity seems to have a greater bearing on the growth of medium and large firms than small firms, and on the location of investments by SMEs
36
Mitigating the impacts of Electricity Insecurity
“SMEs are very used to coping and try to find ways to manage power outages. Many have to work at night because of load shedding during
the day, but this is difficult – women have housework and childcare obligations in the
evenings and for enterprises operating outside the home, factories and offices need
to close for employees to go home” Federation of Women Entrepreneurs Association Nepal
“Stand-by generator not used for running the
machine because, it would be too expensive. Better to
limit hours of operation.” Garment printing SME,
Bangladesh
“When power is off, production is at standstill and thus, the staff has to wait for it to be back or else close and wait for another
day. They have no any other alternative source of power.”
Small engineering SME in Uganda
Mitigating the effects of electricity insecurity
What do firms do? • Backup generators are the most common mitigation solution, although
not necessarily for motive power • Limit hours of production • Change production processes
– Shift patterns and load shedding – Manual labour
• Alternative fuel sources – Diesel engines – Renewable energy
41
Mitigating the effects of electricity insecurity
Opportunities to improve mitigation practices • Accept generator use a fundamental, improve access and technology • Facilitate generator sharing • Grid power improvement • Load shedding schedules – to allow for good management practices and
changes in operation • Support to access renewable energy
42
Conclusions
Policy conclusions
• Improve the reliability of grid electricity supply – short-term action to reduce technical faults and longer-term interventions to increase generation capacity
• Where unreliability is caused by lack of generation capacity, provide reliable load shedding schedules, as these can reduce the impact of outages
• Improve access to alternative energy sources such as generators and renewable energy, through credit schemes, tax or duty concessions and shared ownership arrangements
• Provision of information and skills/advice (associations)
44
ODI is the UK’s leading independent think tank on international development and humanitarian issues. We aim to inspire and inform policy and practice to reduce poverty by locking together high-quality applied research and practical policy advice. The views presented here are those of the speaker, and do not necessarily represent the views of ODI or our partners. This material has been funded by UK aid from the UK government. However, the views expressed do not necessarily reflect the UK government’s official policies.
Overseas Development Institute 203 Blackfriars Road, London, SE1 8NJ
T: +44 207 9220 300
www.odi.org.uk
e.darko@odi.org.uk a.scott@odi.org.uk
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